The risk of Clicks-and-Mortar

An incident over the holidays highlighted the downside when traditional retailers pursue a “clicks-and-mortar” strategy. Rather than being a box every retailer should check, traditional retailers, particularly successful ones, need to look at the risks as well as the opportunities and build a strategy that takes these into account.

About two weeks before Christmas, my wife ordered a video game online from Walmart.com (the world’s largest retailer) for pick up at the store. She received no indication the order was in but assumed it was on the way. Three days before Christmas, after still not receiving confirmation that the product arrived at the retail location, she called Walmart customer service. At this point, she learned the order was cancelled because “the product was damaged.” As this was the gift our son wanted most and was tough to find, she scrambled and eventually got it from Amazon using next-day delivery. After this incident, she vowed not only to stop shopping at Walmart.com, but also to stop going to the retail location (and convincing our son not to shop there).

To me, the key takeaway is that Walmart, incredibly successful with physical retail, is actually losing customers due to its online integration (which is actually better than many other traditional retailers). Thus, rather than increase the lifetime value of a customer (my wife) by adding an online component, they have significantly reduced her lifetime value.

The promise

The appeal for traditional retailers to have an online extension is undeniable. First, they feel it is necessary to compete and keep their existing customers by giving them the chance to shop when and where they want. Second, they see it as a way to reach to new customers. Third, they see it as a way to extend their relationship with existing customers. Finally, they see it as a way to expand their product offering (and revenue), since they can offer more goods online than at an individual retail location.

On the face of it, many retailers also feel their core business gives them a competitive advantage. Pure online retailers do not have the distribution and locations to drop ship items to central locations. Walmart or Best Buy or other retailers can aggregate orders and deliver them to their stores, thus experiencing much lower shipping costs that should allow them to offer lower prices or enjoy higher profits.

Finally, by using online shopping to deliver goods to retail location, the retailer increases the traffic at its stores. When customers come in to pick up an order, they may purchase other goods that they see at the store that otherwise they would not have been exposed to.

The reality

With all of these potential benefits, and consultants reminding retailers daily, it is easy to see why so many retailers have pursued digital strategies. The reality is that these initiatives often destroy value rather than adding to the retailer’s profits.

First, many retailers have an online experience that is inferior to their competitors or their in-store experience. They may use a template or consultant that gets them live quickly but to customers looks very formulaic and not very appealing. While they know where to put every item in their store, how big to make the aisles, how much help to have in the store at what time, etc., they do not put nearly the same amount of thought into the digital experience. Customers, however, are used to shopping at Amazon or Gilt and expect a comparable experience. This reality either leads to lower than expected online sales or, in a worst case, damages the retailer’s brand and makes customers less likely to visit the store than if there was no digital component.

Second, the online and retail experience may be run by separate teams or digital may be out-sourced. Jos. A Bank, the US menswear retailer, has an online operation that for a long time operated as a separate company from its retail locations. Customers could not return products purchased online to a retail location or walk into a store and get customer service for an issue online. Prices and specials often diverged. Off Fifth, Saks Fifth Avenue’s outlet operation, has separate loyalty programs for online and in-store. It Is hard enough to get users to use one loyalty program and having two creates confusion to the point many customers just abandon both (I know I did). Customers have no patience for not being able to go to a retail location to resolve a problem initiated online. When they do not get service in the store, and are effectively told its not their problem, the customer loses overall confidence in the brand and is less likely to shop either online or in a store.

Third, the integration between digital and physical may not be as seamless either by design or operationally. It may sound great to let people order online and pick up the product at retail but if the inventory systems are not integrated well, the online site may not accurately convey what is or is not available at retail. Thus, customers will show up at the store and be disappointed when their item is not there. After one or two experiences like this, the customer will give up and shop somewhere else. Additionally, as the Walmart example above illustrates, if there is not good communication between the store and the online function or with the customer, they are likely to disappoint and lose customers.

Fourth, the quality of the support and service may not be as strong online, leading to customers disgruntled with the brand. As some retailers have 10 or 50 or more years of experiencing pleasing customers, they understand how to provide the service their customer expects. Their digital unit, however, is often kept separate and builds its own customer support operation. If the standards are lower than at retail (or their competitors), customers will often become unhappy and stop shopping and even share their bad experiences with other (now former) customers.

What it means

As with virtually everything else, setting up an online store for a retailer is not a silver bullet. All businesses need to remember the value of focus, doing one thing great is always better than trying a few things. Moreover, you are only as good as your weakest link so make sure you are not building a weak link.

If a retailer is considering setting up an online operation, it must devote sufficient time to build a plan so that it is beneficial to its customers and the underlying business. Doing what you do at retail will not always translate to online success. You not only need to understand the things your customers find most valuable at your retail location, you need to understand what you have to offer online to meet their needs better than your online competitors.

You also need to have excellent execution. You may include a laundry list of features (like direct-to-store delivery) but if it does not work well you will lose customers (and possibly lose retail customers). In effect: If you do it, do it right.

Key takeaways

While adding an online operation to a traditional retail business sounds great, if not executed well it can actually hurt your retail business.

Risks in setting up an online presence include an inferior experience that hurts your brand, poor integration between your stores and online that leaves customers unhappy and inconsistency in customer service.

Traditional retailers should first consider deeply if moving to digital will be beneficial and if the answer is yes then they need to ensure they execute it properly.

Like this:

LikeLoading...

Related

Author: Lloyd Melnick

I am EVP Casino at VGW, where I lead the Chumba Casino team. Previously, I was Director of StarsPlay, the social gaming vertical for the Stars Group (PokerStars, Sky Betting & Gaming, BetEasy, Full Tilt and BetStars). I was also Sr Dir at Zynga's social casino (including Hit It Rich! slots, Zynga Poker and our mobile games), where I led VIP CRM efforts and arranged licensing deals. I have been a central part of the senior management team (CCO, GM and CGO) at three exits (Merscom/Playdom, Playdom/Disney and Spooky Cool/Zynga) worth over $700 million.
View all posts by Lloyd Melnick

Get my book on LTV

Understanding the Predictable delves into the world of Customer Lifetime Value (LTV), a metric that shows how much each customer is worth to your business. By understanding this metric, you can predict how changes to your product will impact the value of each customer. You will also learn how to apply this simple yet powerful method of predictive analytics to optimize your marketing and user acquisition.

Follow Lloyd's Blog via Email

Enter your email address to follow this blog and receive notifications of new posts by email.

Join 992 other followers

Lloyd Melnick

This is Lloyd Melnick’s personal blog. I am EVP Casino at VGW, where I lead the Chumba Casino team. I am a serial builder of businesses (senior leadership on three exits worth over $700 million), successful in big (Disney, Stars Group, Zynga) and small companies (Merscom, Spooky Cool Labs) with over 20 years experience in the gaming and casino space.